Sinopec’s earnings dropped 10% YoY to RMB18.7bn in 1Q24, 12% below our forecasts. The discrepancy mainly came from the weaker- than-expected QoQ recovery at the refining segment. We expect the company to see higher earnings in 2Q24 as the rise in oil price since mid-March will not only result in higher earnings for the E&P segment, but also lead to short-term boost in refining profit. While we trim our 2024-26 earnings forecasts by 1% and lower our target price for its H shares to HK$4.99, we reiterate our BUY call.

Key Factors for Rating

The decline in earnings was mainly due to the 33% YoY fall in the operating profit of its refining segment to RMB7.0bn in 1Q24. While it jumped 3.2x QoQ from the very low level in 4Q23, it was 31% below our forecast. The refining margin only recovered US$1.2/bbl QoQ (to US$7.15/bbl) in 1Q24, US$1.6/bbl lower than our forecast. The miss was mainly because of the decline in cracking spread of jet fuel.

All other segments posted small YoY growth in earnings or reduced loss. In particular, the operating loss of the chemicals segment narrowed 12% YoY to RMB1.6bn in 1Q24, only half of our expected loss. Its improved product mix with increased ratio of aromatics and high value-added resins lifted profitability. The 10% YoY fall in unit processing cost also helped.

We expect the company to see higher earnings in 2Q24 on a QoQ basis. The rise in oil price since mid-March will not only result in higher earnings for the E&P segment, but also lead to short-term boost of the refining margin and inventory gains for both refining and marketing segments.

The company’s H shares look attractive as we expect them to offer about 8% dividend yield for the coming three years.

Key Risks for Rating

Sharp fall in oil price.

Lower-than-expected profitability of downstream operations.

Valuation

We slightly lower our target price for its H shares from HK$5.02 to HK$4.99 after the small cuts in our earnings forecasts and the recent depreciation of RMB against HK$. Our target valuation remains 0.67x 2024E P/B.

We also lower our target price for its A shares from RMB7.12 to RMB7.11. We still base our target price on its 3-month average A-H premium which has stayed at 54% since late March.